Personal Loans vs. Payday Loans: Which is Better?

You may have heard about payday loans and what comes along with them: quick turnaround time to get cash, usually no credit check, and sheer convenience. However, while they may seem like a perfect option, they do come at a cost.

Payday loans typically have very high interest rates and additional fees, which may cost you more than you bargained for. A personal loan, on the other hand, could be a more solid option since you’ll know exactly what you owe over the loan term.

How do payday loans and personal loans compare? Here’s everything you need to know.

Payday loans vs personal loans: similarities 

Payday and personal loans are similar in that they can be used to pay for almost anything (think: debt consolidation, emergencies, medical bills). As a bonus, if you’re approved, you’ll get a lump sum within a few business days from a lender—sometimes as quickly as one day. 

They both belong in the broad category of installment loans in that you repay with fixed payments over predetermined periods of time, known as terms. Although payday loans are technically installment loans, they have a much shorter term with higher interest rates. Payday lenders and industry insiders often use the phrase “short-term installment loan” to describe payday loans.

What is a payday loan?

A payday loan is a short-term, small-dollar unsecured loan typically due on the borrower’s next payday, often carrying APRs around 400% or higher. Borrowers must pay back the loan over a short repayment term plus substantial interest and fees.

If you don’t pay back the loan on time, the lender can tack on even more interest and fees—on top of what you already owe.

Speaking broadly, you should only take out a payday loan as a last resort, specifically if you’re desperate for quick cash.

What is a personal loan?

A personal loan is an unsecured loan with a fixed annual percentage rate (APR), typically ranging from 6% to 36%, that borrowers repay in monthly installments over a term of 2 to 5 years.

Sometimes, when lenders want to add an extra layer of security to a loan agreement, they may offer a secured personal loan, which means it needs to be backed up by collateral. Collateral is a valuable asset that a borrower agrees to put down to support the loan. If the borrower defaults on their payments, the lender can seize the collateral to compensate for their loss.

Payday loans vs. Personal loans: a comparison

While payday loans and personal loans both put money in your hands quickly, they work very differently. Choosing the wrong one can cost you significantly more than you bargained for. The table below breaks down the key distinctions so you can see exactly what you’re comparing.

	Payday loan	Personal loan
Loan amount	Typically $500 or less	Typically $1,000 – $50,000
Loan length	~2 weeks	~2 – 5 years
APR	~400%	~6 – 36%
Credit check	No	Yes

What to know about payday loans

Payday loans are attractive at first glance, but they should only be used as a last resort after you’ve exhausted all other options.

How do payday loans work?

A payday loan is a short-term loan (sometimes called a check loan or cash advance) that borrowers can get without going through a credit check. Payday lenders grant loans for small amounts, which borrowers are expected to pay back using their next paycheck along with a fee. Typically, the loan term is very short, depending on when you get paid next. To pay back the loan, borrowers have to give the lender a post-dated check or grant them permission to take out the loan amount (with all fees included) from their bank account on their next payday.

Some borrowers are able to pay back the loan in full within the original repayment period. But many end up having to roll over their payday loans into a new loan altogether. This means that borrowers will need to pay a new origination fee as well as a cost increase to borrow more money—on top of what they already owe. 

Pro tip: Payday loans are sometimes called “predatory loans,” which are loans with unjust terms (i.e., extremely high interest rates). Predatory payday lenders sometimes use deceiving loan ads to target people who are desperate for help with their bills or unexpected expenses.

Pros and cons of payday loans

Pros	Cons
✅ Offer funding quickly	❌ Expensive due to crazy high interest rates
✅ Can be used to pay for almost anything	❌ May sink you further into debt
​​✅ Rarely require a credit check	❌ Your bank account can be charged overdraft fees
✅ Variety of different payday loans available	❌ Lenders can be relentless in debt collections

Applying for a payday loan

Payday loans can be an attractive option to borrow money since it’s usually pretty simple to get approved. Most payday lenders only require borrowers to be 18 years old, have a checking account, provide proof of income, and show some identification. 

If you apply in person, you could be approved and walk out with cash in a matter of minutes. Getting a payday loan online typically takes a few business days.

What to know about personal loans

Compared to a payday loan, a personal loan is a better option for emergencies you need to cover.

How do personal loans work?

If a borrower applies for and is granted a personal loan, they can get funded within a few business days. Lenders then require the borrower to repay the loan, plus interest, over an agreed-upon repayment term.

Most personal loans tend to be unsecured, meaning they’re not backed by collateral the way secured loans are. Since unsecured loans don’t have that extra layer of insurance, lenders carefully review your credit score, credit history and debt-to-income ratio when evaluating your eligibility. 

Pros and cons of personal loans

Pros	Cons
✅ Usually repaid in fixed monthly installments	❌ If it’s a secured loan, collateral could be seized
✅ Don’t always require collateral	❌ If you overspend, you could rack up more debt
​​✅ Typically have reasonable interest rates compared to payday loans	❌ May have to pay an origination fee to take out the loan
✅ Can be used to pay for a variety of things	❌ Could hurt your credit score if debt is not paid  on time

Applying for a personal loan

Getting a personal loan requires a few more steps compared to a payday loan, since borrowers need to apply, and lenders need to run a credit check. To get started, you should check your credit score and credit report to get a rough picture of your borrowing ability. By doing this in advance, you can get an idea of the kind of loan and borrowing terms you’re eligible for. 

Once you’ve decided on the loan amount you’d like, shop around for lenders and compare essential details like the interest rate. Once you’ve finished your research, fill out an application to get qualified.

Who should consider a payday loan vs. a personal loan?

A payday loan may be appropriate if you:

• Need a very small amount of cash (under $500) immediately
• Have no other borrowing options available
• Are confident you can repay the full amount plus fees by your next payday
• Understand and accept the high cost of borrowing

A personal loan is typically better if you:

• Need to borrow $1,000 or more
• Want predictable monthly payments over an extended period
• Have fair to good credit and can qualify for reasonable interest rates
• Want to consolidate debt or finance a larger expense

Alternatives to payday and personal loans

Cash advance program from an employer. Some workplaces offer this low-risk benefit to their employees who need emergency funds. How does it work? If you’re in a tough financial bind, an employer with this program will give you cash or a cashier’s check for an advance amount. To make themselves whole, the employer withholds a portion of your future paychecks to pay off the loan. 

Financial assistance programs from local nonprofits. You may already be aware of organizations in your area that help people facing  financial emergencies. Most of these loans have fair terms, but they’re only available to individuals who meet certain income criteria.

Credit cards. Credit card companies sometimes offer customers short-term loans with a lower interest rate than a payday loan – sometimes even a 0% rate. Just be sure to use this option carefully: if you don’t pay these back on time, you could accrue more interest and penalties.

So is a payday loan or personal loan better?

Personal loans are generally the better choice for most borrowers due to their lower interest rates, longer repayment terms, and more manageable monthly payments. Payday loans should only be considered as a last resort when no other options are available and you are certain you can repay the full amount by your next payday. 

Before borrowing, conduct thorough research, review your budget, confirm you can afford the loan payments, and compare rates and terms from multiple lenders.

If you are looking for a personal loan alternative to payday lending, the Upstart platform connects borrowers with lenders offering unsecured personal loans. Checking your rate through the Upstart marketplace takes about five minutes and uses a soft credit inquiry — so it won’t affect your credit score.¹

Frequently Asked Questions

Can I get a payday loan with bad credit?

Yes, most payday lenders do not perform credit checks, making payday loans accessible to borrowers with poor or no credit history. However, borrowers should be cautious about the extremely high interest rates typically associated with these loans.

How fast can I get a personal loan?

Many personal loan lenders can fund approved loans within one to three business days after application approval.

What are the typical fees for each loan type?

Payday loans typically charge $10 to $30 per $100 borrowed as a fee. Personal loans may include origination fees ranging from 1% to 8% of the loan amount.

Can payday loans hurt my credit score?

Payday lenders generally don’t report to credit bureaus, but unpaid debts sent to collections can negatively impact your credit score.

What happens if I can’t repay a payday loan on time?

You may be offered a rollover into a new loan, which adds additional fees and interest, potentially leading to a cycle of debt.